DETERMINANTS OF SOVEREIGN CREDIT RATINGS - EXAMPLE OF LATVIA

Countries can borrow from foreign and domestic creditors by issuing bonds, but two countries will rarely pay the same interest, even if they are similar. The usual explanation is that investors demand an additional risk premium, so long-term interest rates vary because countries are perceived to have different probabilities of default or different credit risk. The paper investigates the determinants of sovereign credit risk ratings of Latvia from 1997 to 2012 assigned by the three leading credit rating agencies, Moody's Investment Service, Fitch and Standard and Poor's. Conducted analysis of sovereign credit ratings, by using first, an alignment and transformation of the rating scales into values and second, ordinary least squares regression, indicates key rating determinants. From the initial number of variables that can be used according to previous studies on the topic, GDP growth rate and unemployment are used in the model to explain actual credit ratings of Latvia in 19972012 and predict future ones in 2013-2014. According to the model, long-term foreign currency rating of Latvia is predicted to improve by the end of 2014 from currently assigned rating levels by two notches either by a single credit rating agency or by one notch by two rating agencies, but still being in the lower medium grade category. Collected data on the changes of the Latvia's credit ratings can be used to forecast the sovereign borrowing costs of Latvia, after joining to euro-zone.